Sticky situation

[lovesledz]

I have a client who as a favor for a friend, co-signed a mortgage for his friend to buy a property. The friend lived in the property initially, but soon turned it into a rental. My client never actually had anything to do with the property other than that he co-signed the note. Eventually, the property was refinanced and my client's name was taken off the mortgage, but not the deed. The friend operated the property as a rental for about 5 years, and reporting everything on his tax return. The problem now, is that the friend has sold the property, and my client has received a 1099-S for one half the proceeds. I'm not sure how to reconcile this on his tax return. My client has never had anything to do with this rental, and it has never appeared on any of his tax returns. His friends CPA told my client that he should just report the sale on his return, with a basis equal to the proceeds reported on the 1099. My client has no idea of what the adjusted basis of the property actually is, he has not actually received any of the proceeds reported on the 1099, and his friend's CPA emphatically stated that he will not share any information with my client. Any help would be greatly appreciated, as I just don't know what to do with this. But what I do know, is that I'm not going to just throw numbers at a tax return, and hope it isn't questioned. I do know that his friend will be reporting a significant loss on the sale.

[Dude]

He must have signed off on the sale if he was on the deed,no? That would have been the best time to enter into an agreement designating that his friend get the 1099s. He should consider issuing his own nominee 1099 https://www.irs.gov/instructions/i10...40388153069760

[Rapid Robert]

his friend's CPA emphatically stated that he will not share any information with my client.

So what? The friend can share it.

I do know that his friend will be reporting a significant loss on the sale.

Ah, so the friend is already sharing some info. Is the loss because the "friend" is fraudulently only going to show half of the proceeds from the sale?

"Eventually, the property was refinanced and my client's name was taken off the mortgage, but not the deed."

If the "friend" was really a friend, this would not have happened. Or maybe you are not being told the whole story.

But back to your question. If all is as stated, then it appears the taxpayer ( your client) should issue nominee 1099. From the General Instructions for Certain Information Returns,

"Nominee/middleman returns. Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received) for each of the other owners showing the amounts allocable to each. You also must furnish a Form 1099 to each of the other owners. File the new Form 1099 with Form 1096 with the Internal Revenue Service Center for your area. On each new Form 1099, list yourself as the “payer” and the other owner as the “recipient.” On Form 1096, list yourself as the “Filer.” A spouse is not required to file a nominee return to show amounts owned by the other spouse. The nominee, not the original payer, is responsible for filing the subsequent Forms 1099 to show the amount allocable to each owner."

[lovesledz]

He did sign off on the deed, I guess with docusign. He wasn't actually at settlement. I know that some of this sounds a bit fishy, but it's not. The client is my son, and I personally know that all of this is correct. The friend is really a friend, but what he stated at the time, was that it would cost 10k to have my son's name removed. I had serious doubts about that, but I don't live in CA, and I was trying to not interfere. As to what the friend is going to show on his tax return, I can't say and I don't want to speculate. I truly believe that the friend doesn't know what the CPA is going to put on his return, I guess he just assumes the CPA will do it right. I have no experience with a nominee 1099, but that sure sounds like the answer. I will look into doing that. Thank you all.

[BOB W]

At closing a check would of been issues to each of the deed holders............... What happened to the checks?????????????

[ATSMAN]

He did sign off on the deed, I guess with docusign. He wasn't actually at settlement. I know that some of this sounds a bit fishy, but it's not. The client is my son, and I personally know that all of this is correct.

I had a similar situation with an extended family member (Father and Son). Father co-signed on the rental property. They had a written agreement that Father will not be involved in any rental activity. Son was 100% involved in income and expenses of the rental. Was there any written contract between your son and the real owner?

[lovesledz]

There was no contract between my son and the actual owner. (his friend) From day one I told him this was a terrible idea, but he was young, and this is his best friend. They are still great friends, there will be no conflict between them on this, it was really the CPA of the friend that seemed to have a problem. As to the checks at settlement, that is a very good question. I assume the entire amount was paid to the friend in one check, but that in and of itself, should have been a question for the settlement agent, I would think. I had also told my son to make sure that his friend made everything clear to the settlement agent about the situation, but I assume he didn't. I do appreciate all of the feedback, I believe that the nominee 1099 to his friend is the answer. Makes much more sense than the friend's CPA's advice to just "put it on your return with the same cost basis as the proceeds from the 1099". This transaction has no place on my son's tax return.

[Anarchrist]

The CPA of the friend didn't have a problem. He was doing his job properly by refusing to disclose client information.

The transaction does have a place on your son's return since he needs to report it as nominee.

[Lee Welter]

It seems to me that Friend owes the client half of the proceeds.

[TAXNJ]

There was no contract between my son and the actual owner. (his friend) From day one I told him this was a terrible idea, but he was young, and this is his best friend. They are still great friends, there will be no conflict between them on this, it was really the CPA of the friend that seemed to have a problem. As to the checks at settlement, that is a very good question. I assume the entire amount was paid to the friend in one check, but that in and of itself, should have been a question for the settlement agent, I would think. I had also told my son to make sure that his friend made everything clear to the settlement agent about the situation, but I assume he didn't. I do appreciate all of the feedback, I believe that the nominee 1099 to his friend is the answer. Makes much more sense than the friend's CPA's advice to just "put it on your return with the same cost basis as the proceeds from the 1099". This transaction has no place on my son's tax return.

Sometimes when money is involved friendship may get in the way. Not saying in your scenario that may happen.

Since you mentioned “From day one I told him this was a terrible idea,....” have you considered getting an impartial Professional party such as a Tax Attorney to advise ?

[BOB W]

Based on the 1099, there were 2 checks issued and probably one of those checks was signed over to the other....

[kathyc2]

There may not have been check(s) issued depending on closing costs and mortgage balance.

Son should have received settlement papers when he signed. They were probably in the e-mail that linked to docu-sign. If he doesn't have them, he can ask friend for a copy.

Sorry, but friends CPA does not have an obligation to you or your son. He does have an obligation to keep his client information private.

I think you have the answer to the original question. Nominee 1099.

[Scarecrow]

IRS Instructions for Form 1099-S state:

“For multiple transferors of the same real estate, you must file a separate Form 1099-S for each transferor. At or before closing, you must request from the transferors an allocation of the gross proceeds among the transferors. The request and the response are not required to be in writing. You must make a reasonable effort to contact all transferors of whom you have knowledge. However, you may rely on the unchallenged response of any transferor, and you need not make additional contacts with other transferors after at least one complete allocation is received (100% of gross proceeds, whether or not received in a single response). If you receive the allocation, report gross proceeds on each Form 1099-S accordingly.
You are not required to, but you may, report gross proceeds in accordance with an allocation received after the closing date but before the due date of Form 1099-S (without extensions). However, you cannot report gross proceeds in accordance with an allocation received on or after the due date of Form 1099-S (without extensions).
If no gross proceeds are allocated to a transferor because no allocation or an incomplete allocation is received, you must report the total unallocated gross proceeds on the Form 1099-S made for that transferor. If you do not receive any allocation or you receive conflicting allocations, report on each transferor's Form 1099-S the total unallocated gross proceeds.”

What this means is that when there are multiple owners of real property, a sale does not automatically mean each owner gets an equal share of the proceeds. In fact, as the above instructions suggest, each owner should receive a 1099-S reporting what he or she actually received.

I bring this up, because all though the correct procedure might be something different, the easiest way to handle this is to report what the 1099-S says, and then zero it out on the tax return, because your client received zero proceeds from the sale. An information return is not the final authority on any transaction. Information returns carry some weight in court, if it appears the taxpayer is trying to pull something. However, assuming you have documentation and records to substantiate the fact that your client received zero from this transaction, the Tax Court would throw out any insistence on the part of the IRS that the taxpayer is subject to tax on money he or she did not receive.

And if it were my client, I would be VERY persuasive to any IRS auditor that tried to challenge the way I reported it on the tax return.

[Lion]

Someone hypothesized that the client received his check and signed it over to his friend. If that possibility still exists, question your client more. The 1099-S might be correct for his tax return -- and a gift tax return might be required.

[Anarchrist]

The OP never stated his son received any money. While it's possible he received money and signed it over to his friend, that was speculation. Though if that is what occurred, that doesn't mean a gift was given or a gift tax return is required. The property wasn't his, thus the proceeds weren't his. Since he wasn't entitled to the money, he can't gift it. If my neighbor borrows $20k from my parents but due to her dementia gives the money to me thinking she is paying back my parents and I give the $20k to my folks, I don't have to fill out a gift tax return. Same here. If money due the property owner was mistakenly given to the OP's son, the son isn't giving a gift when he turns the funds over.

As Kathy said above, the OP "has the answer". Report it on the return, nominee it out. This happens on a regular basis and this is fairly standard procedure to deal with it.